Transcript Baroda and Anand Branch of WIRC of ICAI

LFAR and Other Important
Aspects of Bank Audit
Mayur Swadia
Chartered Accountant
Contents
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Shifting role of the Auditor.
Audit Programme.
Profit and Loss Account.
Basics of LFAR
Posers
LFAR Para-wise
Ghosh and Gilani Committee Reports
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Bank Branch Audit is like an IPL – a
very short game in which we have to
bat like ‘Yusuf Pathan’ and WIN
High quality output in a short
period of time
Shifting role of the Auditor
 Challenge to do quality audit in a
limited time frame.
 Proper audit planning critical.
 Quality of audit and value addition –
key issues.
 All of us must strive to do our best in
the larger interest of our profession.
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Audit Programme
 No planning, is planning to fail.
 Go through last year’s Profit and Loss
Account and Balance Sheet.
 Carry out comparative analysis.
 Find out major variations.
 Probe for major reasons.
Audit Programme
 Go through last inspection, internal
audit, concurrent audit, revenue reports
and compliance by the branch.
 Identify key risk areas for special focus.
 Prepare work schedule on the basis of
the overall analysis with special focus
on identified key areas.
Profit and Loss Accounts
 Existence of system to compute discrepancies
in interest / discount income as well as
interest expenditure & timely adjustment
thereof.
 Discrepancies if material to be reported (MOC
to be issued)
 Existence of system
 Discrepancies to be checked by branch
 Findings of Concurrent Audit/Revenue Audit.
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Audit of Profit and Loss Account
 Test Check interest calculations.
 Verify rates of interest and changes
therein.
 Check interest charge on NPA accounts
 Analysis of yield on advances.
 Test check commission income etc. –
whether as per revenue recognition
norms.
Audit of Profit and Loss Account
 Check provisions for expenses.
 Check depreciation charged correctly.
 General ledger scrutiny and
reconciliation with subsidiary ledgers.
 Compare expenses with previous year.
 Test check major/exceptional expenses.
 Check the powers of the branch to incur
expenses.
Profit and Loss Accounts
(Cont’d)
 Compliance with Income Recognition
Norms.
 System of estimation and provision of
Interest on overdue / matured term
deposits.
 Divergent trends in major items of P &
L A/c if not satisfactorily explained.
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Basics of LFAR
 Why ‘LFAR’? Should it be ‘BCAR’?
 LFAR is an internal control evaluation
questionnaire.
 Comprehensive in scope and coverage.
Where as MAOCARO is not so comprehensive
 Covers both Balance Sheet and Profit & Loss
Account.
 Serves as an important check list for audit
planning.
Make LFAR part of the audit
programme.
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Must Do’s
Study the Questionnaire thoroughly.
Each answer should be precise.
Avoid vague or general comment.
Give specific instances of
weakness/shortcomings.
 Main Audit Report and LFAR are two separate
reports.
 Qualificatory remarks MUST be part of the
main report.
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Must Do’s
 Main Report is a self contained
document and should not contain any
references to LFAR.
 Should be sufficiently detailed and
quantified
to
enable
expeditious
consolidation.
 Do not make current year’s LFAR a
replica of previous year.
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Must Do’s
 LFAR is of utmost importance to the
management as well as the Central Auditors.
 Finalize
Statutory
Report
and
LFAR
simultaneously.
 Should be well drafted.
 Scope of work carried out should be clearly
specified.
 Should create an impact on the bank
management about the quality of work
carried out.
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Refreshers…….
 Mr. CA has taken a housing loan from Bank of
NAMO.
 Monthly installment (principle + Interest) due
on 31st December, 2013 not paid by 31st
March, 2014. Whether the account is NPA?
 Would it make any difference if the said
installment was due on 30/12/2013 or
1/1/2014?
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Term Loans (Posers???)
 Mr. FCA has taken a term loan from bank of
Italy.
 Installment for the October-December
quarter debited on 30th December, 2013 Rs.
1 lac (Incl. int. of Rs. 25,000/ Amount paid by 31st March, 2014 against the
same Rs. 95,000/-. Branch Manager has
classified the account as a Performing Asset.
Your audit assistant has approved the same.
Do you have any counter view?
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Term Loans
 Mr. Article has taken a housing loan from a
bank. Equated Installments (principal +
interest) are payable on a monthly basis. Mr.
Article is generally regular in repayment.
However, installments for the months of
October and November, 2013 could not be
paid by 31/3/2014? All the other installments
are paid for the year ended 31/3/2014.
 Is he OUT??? or NOT OUT???
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Term Loans
 Any loan account where the
monthly/quarterly/half yearly/annual
installment (principle + Interest) falls
due on or before 30th December, 2013
and if the same is not FULLY paid by
31st March, 2014, the account would
have to be classified as an NPA for the
financial year ending 31st March, 2014.
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Posers???
 A Ltd. Has availed Cash Credit facilities.
Interest for the quarter October-December,
2013 is Rs. 2,50,000/-. Credit during the
quarter Rs. 2,45,000/-.
 Interest for the quarter January-March, 2014
is Rs. 2,80,000/-.
 Credits during the period January-March,
2014 are Rs. 2,79,000/-.
 The Branch Manager requests for your valued
opinion?
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Cash Credit
 Y Ltd has taken Cash Credit from a
bank. Interest debited during the
quarter January-March, 2014 is Rs.
50,000/-. No credits in the account for
last quarter except one credit entry for
reversal for excess charge of
commission in the past for Rs. 51,000/-.
 HOWZZZTHAT?????
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Posers???
 B Ltd. has a Cash Credit facility (based on
hypothecation of inventory and debtors). The
sanctioned limit is Rs. 10 lacs. Drawing power
is Rs. 7.5 lacs. Outstanding balance in the
account is around Rs. 7 lacs for JanuaryMarch, 2007. Your assistant has noticed that
inventory statement includes dead stock of
Rs. 3 lacs and statement of debtors includes
non-realizable debtors of Rs. 2 lacs. Hence
the actual DP is only Rs. 4.5 lacs. How would
you classify the account?
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Posers???
 C Ltd. has CC facilities. The account is healthy
and there are no outstanding overdue as at
31/3/2014. On verifying DP calculation, you
notice that DP is worked out based on last
available stock statement of August, 2013.
The account is classified as a Performing
Asset. Is it OK?
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Posers??
 D Ltd. again has CC facilities. It is a blue-chip
company with strong Balance Sheet. The
account is healthy with no overdue
outstandings. The limit was due for review on
October 1, 2013. However, the same could
not be reviewed by 31/3/2014? The account
is classified as a PA. How say you?
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Posers???
 Y Ltd. Is a chemical manufacturing concern.
The unit is not in operation for 6 months.
Inventory of Rs. 20 lacs is carried forward for
last six months. Outstanding dues in CC
account are Rs. 10 lacs. Account is fully
serviced as at the Balance Sheet date. You
have noticed that inventory of Rs. 15 lacs had
expiry period of 120 days. How would you
classify the account?
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Posers???
 H Ltd. Has CC facility of Rs. 100 lacs.
The account is healthy. There is
overdrawing in the account in the
month of January by Rs. 10 lacs for 10
days. In the month of March the
account is overdrawn by Rs. 15 lacs for
the period 25th March, 2013 to 3rd April,
2014. How would you classify the
account?
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Posers???
 Ram Ltd. and Laxman Ltd. are
sister(brother??) concerns. The account of
Ram Ltd. has become NPA. The other
account is Standard. Laxman Ltd. was
sanctioned additional facilities as at the year
end. Laxman Ltd. gave a loan to Ram Ltd.
Out of the same, Ram Ltd. cleared its
outstanding dues of the bank at the year end.
Ram Ltd. is classified as Performing asset at
the year end. Is it correct?
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Posers???
 M Ltd. is a healthy manufacturing unit with
no overdue outstanding in either CC/TL/BPBD
account. Fire takes place on 31/3/2024 and
all the assets are destroyed. There is no
insurance cover. Bank has classified the
account as a Standard asset based on the
norms. As an auditor, what is your call?
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Posers??
 In the case referred to in the previous
slide, assume that the fire takes place
on April 1, 2014. Would there be any
change in your opinion with respect to
classification of the said account as at
31st March, 2014?
 What is the date on which the account
would become NPA?
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Bills Purchased/Discounted
 X Ltd. Has facilities from Metro Bank
Ltd. Cash Credit and Term loans are
serviced regularly. Bills account is also
regular except for one bill due on 29th
December, 2013, which is overdue.
How would you classify the various
facilities of X Ltd?
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Posers???
 Bank of Vadodara is a listed bank. You
are the branch auditor of the bank.
 Borrower X has obtained loan against
pledge of shares.
 The list of shares pledged includes
shares of Bank of Vadodara.
 Is there any audit objection?
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Posers???
 Robert Ltd. Has availed loan from PQR bank.
You are the auditor of the bank.
 On scrutiny of the account of Robert Ltd., you
notice that wife of the director of the bank
has 26% stake in the company. However, she
is neither director or employee of the
company.
 Is there any irregularity on the part of the
bank?
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Posers???
 Loan granted against 10% Government of
India security. Interest and installments of
last two quarters not paid.
 Manager has classified the account as NPA.
 Interest has been accounted on cash basis.
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Posers???
 X has taken loan against his term
deposits?/NSC’s/IVP’s/KVP’s and life
insurance policies. Interest has remained
overdue for 120 days as 31/3/2014. The
branch has recognized the interest income on
accrual basis. Is it correct? What would be
the asset classification?
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Posers???
 Z Ltd. Is an NPA account (outs principle Rs.
50 lacs + Outs interest Rs. 25 lacs) It has
paid Rs. 5 lacs during the year against its
overdue loan. Bank has accounted the same
as income for the year. Z Ltd. Had requested
to settle the same against outstanding
principle amount. What is your call?
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Posers??
 A Ltd. Has a CC facility with bank
against inventory. Facility is for Rs. 50
lacs. Inventory is Rs. 100 lacs. Sundry
creditors against goods are Rs. 50 lacs.
Margin specified is 25%. What would
be the DP?
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Coverage
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Cash and Bank Balances.
Money at call and Short Notice.
Investments.
Advances
Other assets.
Deposits and other liabilities.
Profit and Loss Account.
General.
Specialized Branches.
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Cash
 Cash balance which vary significantly from the
limit fixed by controlling authorities.
 Excess balance reported to the controlling
authorities.
 Adequate Insurance Cover.
 Joint custody.
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Refer Instructions, Key Movement Register.
 Periodic checking of cash balance.
 Ascertain procedure and observe during audit
 General scrutiny of cash book.
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Balance with RBI, SBI and
other Banks
 Balance confirmation.
 Report differences.
 Observations on differences.
• Cash transactions remaining unresponded
(very serious observation).
• Revenue items requiring adjustment / write
offs. (issue MOC / Qualify report)
• Old
outstanding
balances
remaining
unexplained and age wise analysis.
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Balance with RBI, SBI and
other Banks (cont’d)
 Item
requiring
special
attention
of
management.
 Reconciliation not done / procedure not
followed.
 Material amount unadjusted for a long time.
 Items affecting financial statements may be
reported in the Statutory Report.
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Money at call and Short Notice
 Report even if a single transaction.
 Confirm that the transaction is as per
the instructions/guidelines.
 Unauthorized deposits and excess of
authorized deposits to be reported.
 Normally not applicable to branches.
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Investments
 Physical verification on behalf of H.O.
 Ensure that income earned on such
Investments is not accounted by Branch.
 Matured or overdue investments not
encashed.
 Guidelines of RBI for transaction and
valuation followed.
 Examine evidence of securities not in
possession of the branch.
 Generally not maintained at branch level.
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Advances
 Examination of all large advances and a test
check of other advances
 Questionnaire in four Broad categories
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Credit Appraisal
Sanctioning / Disbursement
Documentation
Review / Monitoring / Supervision
 Higher of advances exceeding Rs. 2 crores or
5% of the advances of the branch needs to
be individually audited.
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Credit Appraisal
 Opinion is sought on compliance of Procedure
/ Instruction of controlling authorities
 Whether loan application in prescribed
format.
 Whether intelligent appraisal done by
competent person.
 Adequate appraisal documentation.
 As per the old format required to report on
major shortcomings in credit appraisal.
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Sanctioning / Disbursement
 Credit facilities beyond the delegated
authorities.
 Are such cases promptly reported to higher
authorities?
 Verify control returns.
 Advances disbursed without compliance of
terms of sanction (give details)
 eg: Necessary funds not brought in by the
borrower.
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Sanctioning / Disbursement
(Cont’d)
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Net worth of the guarantor not furnished.
Unit not inspected.
End use of the funds not verified.
Borrower continuing to have operations
with other Banks.
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Documentation
 Instances of credit facilities released without
execution of all the necessary documents?
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Verify legal status.
Government recognized status.
Type of Loan.
Securities.
 Instances of deficiencies in documentation,
non registration of charge etc., (give details)
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Documentation (Cont’d)
 Some instances of deficiencies
 Documents left blank.
 Overwriting in documents, change in hand writing,
incomplete documents.
 Joint documentation in case of consortium
advance.
 Documents inadequately stamped.
 Documents time bared.
 Additional reporting requirement on advances
against lien of deposits.
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Review / Monitoring / Supervision
 Periodic review of advances including balance
confirmation / acknowledgement of debts etc.
 Analysis of such accounts overdue for review.
 System of receipt of Stock / Book Debt and
other statement and scrutiny thereof.
 System of obtaining Stock Audit Report.
 Audited accounts as per RBI guidelines from
non corporate entities with limit beyond
Rs.10.00 lacs.
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Review / Monitoring /
Supervision (Cont’d)
 Physical verification of securities as per
procedure laid down?
 Deficiencies in value of securities, frequent /
unauthorized drawings, inadequate insurance
etc.
 New clauses relating to lease finance
activities and credit card dues.
 Clauses relating to Prudential Norms.
 Clause relating to DICGC. (modified formats)
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Review / Monitoring / Supervision
(Cont’d)
 Compliance by Branch with Recovery Policy /
in respect of Compromise / Settlements /
Write off.
 Details of such cases where waiver / write off >50
lacs.
 Major deficiencies in credit review /
monitoring / supervision.
 New Clause relating to guarantee and letter
of credit (clause 5 (e).
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Other Assets
 Stationery and Stamps. [Clause 6(a)]
 Comment on existence and compliance
with Internal control system over
valued stationery with regard to issue
and custody.
 Instances of missing or lost items of
stationery to be given (new clause).
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Other Assets (Cont’d)
Suspense Accounts / Sundry Assets.
 Critically Scrutinize these accounts.
 Details and clarification in respect of old
unadjusted entries be obtained.
 Balances which in your opinion are not
recoverable.
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eg: Advance against travelling.
Payment to merchant establishment.
Legal expenses
Dividend / Interest paid.
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Other Assets (Cont’d)
 Unusual items in these accounts be
reported
eg: Cash in transit
• Difference in balancing.
• Difference in cash.
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Deposits
 Compliance with guidelines in respect of
inoperative accounts.
 Instances if not complied with the
guidelines.
 Seek
clarification
for
unusual
movements after balance sheet date.
 Quantification of Overdue / Matured
term deposits at the year end.
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Bills Payable / Sundry Deposits
/ Contingent Liabilities
 Details of old items to be reported.
 Unusual items and matured withdrawals
or debits to be reported along with their
nature and amounts.
 List of major items of contingent
liabilities other than Guarantees, LCs,
Endorsements, Acceptances etc.,
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General
 Proper maintenance of manual Books of
Accounts.
 In respect of Computerized Branches
number of new areas prescribed.
 Inquire about
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Compliance of the policy
Internal Control & Security measures.
Backups and Disaster Recovery Plans
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General (Cont’d)
 Suggestions for the improvement in the
system
 Reconciliation of control and subsidiary
records.
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General (Cont’d)
 Inter Branch Accounts, (Very Important
area)
 Understand the system.
 Daily Communication to HO/Designated cell
statement of debit / credit transaction.
 Agreement between balance in HO Account
Branch Accounts.
 Old outstanding debits in the Head Office
Account.
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General (Cont’d)
 Expeditious compliance to communication
from HO / Designated cell (Report
unresponded entries).
 Old / Large outstanding transaction at
debits as at year end.
 Audit and Inspection.
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General (Cont’d)
 Particulars of frauds discovered during
the year together with your suggestions
to minimize the same.
 Window dressing to be reported
 eg. Large deposit at year end.

Under utilised facilities converted in
Deposits.
Unsecured loans shown as secured.
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General (Cont’d)
 Maintenance of Fixed Assets Records.
 Documents of title in relation to branch
 Non compliance with Ghosh and Jilani
Committee recommendations.
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GHOSH COMMITTEE
RECOMMENDATIONS WERE FOR
 Improvement in day to day administrative
functions.
 For ensuring safety of assets.
 Compliance with the let down policies and
procedures.
 Accuracy and completeness of accounting and
other records.
 Proper segregations of duties and
responsibilities of the staff.
 Timely prevention and detection of frauds and
malpractices.
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Ghosh Committee
Recommendations
 Recommendations divided in to four
groups
 Group-A: Recommendations, which
have to be implemented by the banks
immediately.
 Group-B: Recommendations requiring
Reserve Bank of India’s approval.
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Recommendations
 Group-C: Recommendations requiring
approval of Government of India.
 Group-D: Recommendations requiring
further examination in consultation with
IBA.
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JILANI COMMITTEE
 Working group to review the internal
control and inspection and audit system
in banks.
 Contains 25 questions and to indicate
the answer as either “Implemented “ or
Not Implemented”.
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GILANI COMMITTEE
RECOMMENDATIONS
Broadly divided into three categories
 Dealing with the EDP environment in
the banks.
 Dealing with the inspection/Internal
audit system in the bank.
 Dealing with other miscellaneous
aspects of functioning of a bank.
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Thank you